The Office of the Superintendent of Financial Institutions (“OSFI”) recently released updated versions of its guides (collectively, the “Guides”) for incorporating banks, federal trust and loan companies and federal insurance companies and establishing foreign insurance company branches in Canada (collectively, “FRFIs”). The Guides describe the current application process and information requirements, which have evolved since the Guides were last updated. Many of the changes were being communicated to applicants informally, but it is a significant benefit to new applicants to have the current expectations clearly set out.
Generally, the updated Guides reflect the fact that establishing a FRFI has become a more difficult undertaking as OSFI’s expectations have become increasingly stringent, particularly since the global financial crisis that started in 2008. The key changes to the Guides are summarized below.
Summary of Key Changes
- The Guides clearly highlight that OSFI’s expectations and practices continue to evolve and that the information requirements in the Guides are not exhaustive. In our view, it is important to recognize that the particular circumstances and facts of each application are different and that effective interaction with OSFI and an understanding of the evolution of OSFI’s priorities and approach to regulation are integral to bringing about a successful application. The Guides support this view in several ways, including by indicating, as has not been done in the past, that OSFI may “discontinue its review of an application” where applicants are unable to satisfy requirements in a timely, clear and complete manner.
- Notice of intention to apply (“Notice”) for letters patent of incorporation (“Letters Patent”) or an order to insure in Canada risks (“Order to Insure”) in the case of a foreign insurance company branch is to be published before the application is made. OSFI’s previous practice was for notice of intention to be published at a later stage once OSFI had a certain level of comfort with the application.
- The Guides state that the issuance of Letters Patent, an order to commence and carry-on business (“Order to Commence”) or an Order to Insure is generally expected to take at least 12 to 18 months from the initial application to completion. This reflects the reality that the application process takes longer than it previously did as OSFI takes a very thorough approach to reviewing applications, and typically has significant comments on the material that is provided to it (which in turn takes the applicant time to respond to). OSFI also conducts a thorough on-site review before issuing an Order to Commence, which is required to begin operations following issuance of Letters Patent in the case of incorporations, or before issuing an Order to Insure in the case of a foreign insurance company branch.
- Applicants are expected to provide, in the case of Canadian incorporated FRFIs, a written commitment to provide the proposed initial capital of the FRFI as detailed in the business plan. Such written commitment and the Notice must be completed before OSFI will begin its review of an application. This written commitment is in addition to the requirement that a person who will control the FRFI provide an acknowledgement of the Support Principle.
- For bank or federal trust and loan company applications, as part of the required business plan applicants must provide a breakdown of all elements used to calculate the risk-based capital ratios on a Basel III basis, and must also provide a pro-forma Internal Capital Adequacy Assessment Process (“ICAAP”) reporting template, as outlined in OSFI guidance. Most notably, the Guide states that although, as per applicable legislation, an institution must have paid-in capital of at least $5 million, or any greater amount that may be specified by the Minister of Finance, prior to the issuance of an Order to Commence, “OSFI generally expects that the initial amount of paid-in capital will be sufficient, at all times, for the [institution] to remain above its target risk-based capital ratios and remain below its authorized assets to capital multiple for the longer of the first three years of the [institution’s] operations, or until it is profitable under the base case scenario” of projected financials set out in its business plan.
Capital related changes for insurance companies:
- In connection with the required three-year pro forma capital calculations (MCT for P&C companies, MCCSR for life companies, BAAT for property and casualty foreign insurance companies and TAAM for life foreign insurance companies), applicants must provide base case and scenario stress testing supporting the FIC’s proposed internal target ratio showing the results on the base case business plan (including a worst case scenario and a scenario with a maximum single loss). The instruction guide refers to OSFI Guideline E-18 Stress Testing in connection with this and states that applicants are strongly encouraged to contact OSFI to ensure scenarios correctly stress the proposed businesses.
- OSFI generally expects the internal target ratio to be at least 300% for all newly established federal insurance companies or foreign insurance company branches and OSFI generally expects the initial amount of paid-in capital to be sufficient, at all times, to maintain the insurance company’s or branch’s internal target ratio above its selected internal target for at least the first three years of operations.
- Applicants are expected to provide copies of a number of policies and procedures in addition to those referred to in the prior application guides. Some of these relate to guidelines and initiatives OSFI has introduced since the time of the prior application Guides, notably the following: (i) stress testing, (ii) compensation, (iii) in the case of insurance companies, reinsurance risk management, (iv) in the case of banks and federal trust and loan companies, residential mortgage underwriting, (v) operational risk management, (vi) business continuity management, and (vii) proposed provisioning.
- Applicants are expected to provide a detailed description of all risks including market and credit, operational, regulatory, reputational, strategic, product design, pricing and underwriting in the case of an insurer, and others.
- Applicants are expected to provide information regarding the proposed senior officer to be responsible for risk management oversight.
- Applicants are expected to provide a risk appetite framework.
- Applicants are expected to provide, in the case of Canadian incorporated FRFIs, an analysis demonstrating that the proposed FRFI’s corporate governance policies and practices will comply with OSFI’s Corporate Governance Guideline.
- Applicants are expected to provide information regarding information technology beyond what was described in the prior application guides, including a risk assessment of the IT operations, a description of any integration with third party systems and the proposed end user computing policy.
- Applicants are expected to provide a signed letter of commitment by the FRFI to the effect that it will provide OSFI with adequate advance notice of any proposed material changes to the business plan submitted as part of the application.
- For bank and federal trust and loan companies intending to take retail deposits, the Guide now highlights that, unlike in the past, applicants are not required to make a separate application to the Canada Deposit Insurance Corporation (“CDIC”) for required retail deposit insurance. OSFI will contact CDIC regarding any application for Letters Patent that includes a proposed retail-deposit-taking activity.